Month: May 2009

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On the Line: Guyana Bank for Trade and Industry Annual Report 2008 – revisited

Guest business column by Robert V McRae, CPA

Background
Several weeks ago the Bank of Guyana (BoG) publicly and the Guyana Bank for Trade and Industry (GBTI) management privately in a letter to me, responded to a guest Business Page published in Stabroek News of April 12, 2009 under my name. Unfortunately, personal commitments precluded me from addressing this matter earlier and for this I apologise.

Of specific concern to both entities were two paragraphs under the caption ‘The blog and the BoG.’ The two paragraphs contained information derived from the Annual Report of the bank and merely raised legitimate questions over the original response to the blog, particularly why it did not acknowledge the overnight borrowing by the bank or the deficiency in the statutory reserve requirement of more than $4B at December 31, 2008. After the column had raised the matter the Bank of Guyana advised that the shortfall was “authorised,” a fact that was not evident prior to its public statement.

Overnight borrowing
While the BoG must be commended for its prompt dispelling of any doubt surrounding the bailout claim, it should have at the time acknowledged the approach for the overnight facility while asserting that transactions of a similar nature were not unusual. This was clearly an unnecessary and unfortunate omission that did little to help the cause it was seeking to promote.

In its direct response to me, the management of GBTI has correctly made the point that the BoG’s half year report 2008 reveals sixty-three trades in the inter-bank market with the value of funds traded totalling $20.4B. It is of interest to note that the average value of these trades is approximately $324M, so in terms of its magnitude, that specific transaction of $1.5B by itself must be considered unique and therefore warranting more explanation than was provided.

Reserve requirement deficiency
The second issue and the reference to the deficiency in the reserve requirement was that maintenance of this reserve is a statutory requirement and nowhere in the financial statements could the reader deduce from what date or why this shortfall had occurred, nor was there any indication whether the situation had been corrected, as was the case in the Bank’s 2007 annual report, (It has since been revealed by the BoG press release that the 2008 shortfall was corrected.)

Indeed, financial reporting standards which specify that, “if the quantitative data disclosed at the end of the reporting period are unrepresentative of the company’s exposure to risk during the period, an entity shall provide further information that is representative,” would seem to make such disclosures mandatory – another unhelpful omission.

Bank of Guyana press release
The press release also refers to discretion which the Bank of Guyana is allowed to exercise in these matters. As far as this writer is aware, discretion exists in the relevant legislation only with respect to the imposition of penalties for deficiency in the reserve requirement, and does not allow for authorisation of what is tantamount to a breach of law. Consequently it appears that the BoG acted without authority.

In the current economic climate the BoG must not only be seen to be acting promptly but it must also act impartially, and if it does engage in a public issue it must ensure it does so fully, fairly and completely.

It would have been extremely helpful and enlightening for BoG to have addressed the following:

1. The number of shortfalls in reserve requirements during 2007 and 2008 and the number of entities involved.

2. The circumstances in which BOG would “approve” a breach of the statutory reserve requirement by a financial institution.

3. GBTI management has indicated that the transactions resulting in the reserve requirement deficiency at the end of 2007 and 2008 were similar. The BoG should confirm whether it granted a similar “approval” in 2007 for the breach of the reserve requirement, and cite the specific authority for any such approval.

Conclusion
Nowhere in the earlier column was there any attempt to give credence to the spurious claim by the blog that the GBTI required a bailout, nor any question raised about the financial soundness of the bank.

As a public company, whether the management of GBTI disapproves or not, any member of the public is entitled to seek clarification of any matter on which there is inadequate or no information. Financial statements are only as good as the information they contain and the users can only draw conclusions based on what is disclosed. Rather than leave unanswered questions, the management of all public companies and most especially financial institutions should lean towards more helpful rather than less disclosure unless confidentiality or competitiveness will be compromised.

The questions raised in the article go to the heart of transparency, accountability and fairness. The BoG must avoid any appearance that it favours one institution over others and ought not to overlook, in matters of this nature, the implications for its role as an independent, supervisory watchdog over the sector.

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The minister responsible for NIS is not the President but the Finance Minister

I applaud the initiatives in Friday’s Stabroek Business for persisting with certain issues that do not seem to receive much attention in the other sections of our newspapers. I must however take issue with the editorial in the Stabroek Business of May 8 in which the writer called on the President “to make clear his personal concerns over the particular transgression” regarding the non-deduction/payment by employers of NIS contributions for their employees.

Such a call is not only ill-informed but is also dangerous. Why do we need the President’s “personal concerns” when the minister responsible for the National Insurance Scheme is the Finance Minister? And the writer must surely know that the Attorney General, who just shifted chair back into Cabinet, can with proper respect for the principle of separation of powers among the arms of the state, raise the concern with the Chancellor.

It is also dangerous because as a paper of record Stabroek News should avoid endorsing the improper but regular practice of having the President interfere in matters completely outside his portfolio. We have seen what a mess he makes even when he speaks of matters within his portfolio, such as the Integrity Commission affair. Let me mention an example of the President speaking on the NIS. In 2007 before I resigned as a member of the NIS Reform Committee I wrote the President asking for particulars supporting an announcement he had made in Berbice that “thousands of persons” were being deprived of their pensions because of the state of the records in the NIS. After several weeks, the list I got back had just over 20 names, and on investigation, many of them did not qualify and were therefore properly denied.

While non-deduction/payment is indeed a problem, the NIS faces real and disastrous consequences from Cabinet’s failure to act on the recommendations contained in the 2001 and 2006 Actuarial Reviews and the unlawful and high-risk investments in Clico and the Berbice Bridge, apparently made under a paper baptised by Cabinet. The Head of Cabinet of course is the President himself, while his chief-of-staff Dr Roger Luncheon is the Chairman of the Board of the NIS.

Finally let me say that the scheme continues to act unlawfully or not act as the law requires with its misguided Ministry of Labour/NIS Memorandum of Cooperation. That seems to be the brainchild of someone who has not read the National Insurance Act or who does not have real work to do. Ironically any otherwise delinquent employer could challenge any action by this “inspectorate team” as being unlawful. Oh, what a mess we make!

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The Insurance (Supplementary Provisions) Bill 2009

I note that the Minister of Finance Dr. Ashni Singh has introduced legislation [The Insurance (Supplementary Provisions) Bill 2009] that will bring the functions of the Commissioner of Insurance (CoI) under the Bank of Guyana (BoG). The Explanatory Memorandum states that the “Bill seeks to pave the way for the Bank of Guyana (not the Commissioner of Insurance) to administer the Insurance Act and for a person nominated by the Bank to be appointed by the Court as judicial manager.” Because it was the first reading of the Bill, the Minister was not required to nor did he otherwise give any reason for this move which is not without considerable significance. Such a move would however have been helpful in alerting parliamentarians and the public of the thinking behind the legislation and directing their minds to the kind of preparation they should begin in order to contribute meaningfully to the progress of the legislation.

The Clico meltdown exposed in a rather dramatic and disastrous fashion some of the weaknesses of the existing legislation and its operations. But it also emphasised the need for a more exhaustive examination by an impartial body of the causes of the debacle and the steps necessary to better regulate the insurance sector and prevent similar failures in the future. Without the benefit of that exercise, I can only rely on my experience of the Insurance Act in relation to audits, revelations about Clico as well as – let’s not forget – the GuyFlag/Fidelity story in offering any opinions. Those suggest that what we need are fundamental changes both to the regulatory framework as well as how it operates. The proposed Bill falls very short.

The only change being made by the Bill is the transfer of responsibility for the supervision of the Office of the Commissioner of Insurance from the Commissioner of Insurance to the BoG. This raises the obvious question whether the Minister really believes that that is all that is necessary to fix the system that certainly failed us in the case of Clico and serves us poorly in the case of GuyFlag/Fidelity. One assumes that the Minister would have been kept fully informed by the Commissioner of Insurance that the breaches of key provisions of the Insurance Act by Clico were putting policyholders and depositors at considerable risk. Are those addressed by this Bill? I think not.

There is only one Commonwealth Caribbean country that I know of where the insurance industry is supervised by the Central Bank – Trinidad and Tobago which coincidentally has also had the biggest failure to stakeholders, other than Guyana. In Barbados and Belize the sector is supervised by a Supervisor of Insurance operating under the Ministry of Finance. Jamaica has what I consider to be the best model and one which was recommended in Ram & McRae’s Focus on Budget 2009, i.e. a Financial Services Commission. Under that umbrella can fall responsibility for the supervision of such sectors as insurance, securities, prevention of money-laundering and even the financial institutions. That would allow the central bank to deal with its core objectives, namely “the fostering [of] domestic price stability through the promotion of stable credit and exchange conditions, as well as sound financial intermediation conducive to the growth of the economy of Guyana.”

While the Commissioner of Insurance has had to take responsibility for much of Clico’s regulatory failure, the Bank of Guyana too failed to detect that Clico was engaged in deposit-taking which required Clico to apply to the Bank for a licence under the Financial Institutions Act. In fact the disclosures surrounding financial/quasi financial institutions including Clico, the Hand-in-Hand Trust, the New Building Society and the National Insurance Scheme suggest that the Bank of Guyana has its own problems. To add to its mandate supervision for the insurance sector can compound those problems.

I hope that the Bill is a mere temporary measure until the President’s promised investigation into Clico makes more extensive and meaningful recommendations. I hope we do not have to wait too long.